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Executives

Bill Pfund - VP of Investor Relations

Brian Gamache - President and CEO

Orrin Edidin - EVP and COO

Scott Schweinfurth - EVP, CFO and Treasurer

Analysts

Joe Greff - Bear Stearns

Harry Curtis - JP Morgan

Bill Lerner - Deutsche Bank

Celeste Brown - Morgan Stanley

Todd Eilers - Roth Capital Partners

Steve Wieczynski - Stifel Nicolaus

Steve Altebrando - Sidoti and Company

WMS Industries, Inc. (WMS-OLD) F1Q08 (Qtr End 9/30/07) Earnings Call November 5, 2007 4:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the WMS Industries' 2008 First Quarter Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded today, Monday, November 5, 2007.

It is now my pleasure to turn the conference over to Bill Pfund, Vice President, Investor Relations. Please go ahead, sir.

Bill Pfund

Thank you, Dave. Welcome everyone to WMS' first quarter fiscal 2008 conference call. With me today are Brian Gamache, President and Chief Executive Officer, Orrin Edidin, Executive Vice President and Chief Operating Officer, and Scott Schweinfurth, Executive Vice President, Chief Financial Officer and Treasurer.

Before we start, I would like to review our Safe Harbor language. Our call today contains forward-looking statements concerning the outlook for WMS and future business conditions. These statements are based on currently available information and involve certain risks and uncertainties. The Company's actual results could differ materially from those anticipated in the forward-looking statements depending on the factors described under item one, Business Risk Factors in the Company's Annual Report on Form 10-K for the year ended June 30, 2007, and in our more recent reports filed with the SEC.

The forward-looking statements made on this call and webcast, the archived version of the webcast and in any transcripts of this call are only made as of this date, November 5, 2007.

Now, let me turn the call over to Brian.

Brian Gamache

Thank you, Bill, and good afternoon, everyone. Today WMS reported net income $11.1 million or $0.19 per diluted share on record first quarter revenue of $132.5 million which [shall] be seen in the revenue guidance we had provided. These results again demonstrate the excellence of operating leverage in our business, as 20% year-over-year revenue growth led to a 56% increase in net income.

Additionally, cash flow from operations improved 51% over last year to $39 million, a record than our first quarter record. This improve in cash flow and the $26 million quarterly sequential increase in our ending cash balance, highlights another key achievement in the continued evolution of WMS and our ability to consistently to generate long-term shareholder value.

We are delighted that this consistent revenue of [Technical Difficulty] growing companies. With marketplace dynamics in fiscal 2008, echoing much of what the industry experienced in the prior year. We remain focused on the five key strategic priorities that we executed against so successfully in fiscal 2007, and we are pleased to report today the continued success in our track against these five priorities.

One first priority is to continue to purse the managed expansion of our high margin gaming operations business by simultaneously working to achieve the balance between aggressive growth of our total installed footprint and proactive management of that footprint to achieve a greater mix of higher revenue producing products on the slide 4 and particularly a greater number of high revenue producing WAP products.

During the September 2007 quarter, our average install base of participation gaming machines increased 19% over last year, and at quarter end our total installed participation footprints stood at 8,694 units. Importantly, WAP units comprised 19% of the average footprint for September quarter, up from 17% in the June 2007 quarter. This growth along with the improvement in the average daily revenue produced a 23% year-over-year increase than revenue from our gaming operations business.

Our second priority remains keen on North American product sale market share. The rapid significant casino openings in major expansions in the 2000 September quarter made for tough comparison to last year, and coupled with the ongoing product replacement cycle, the overall industry demand is limited. Yet, in spite of this, our North American unit sales declined only slightly as we continue to gain market share in a top competitive market place. We continue to capture a greater portion of our customers' available capital dollars, because of our capability to offer innovative and differentiated video and mechanical reel products.

In the September 2007 quarter, our new Wrap Around Pays video games, as well as our new expanded volume of three-reel, multi-lying, multi-coin mechanical products were significant contributors to our domestic unit sales. In addition, our expanded bandwidth, coupled with WMSs' strength and content contributing directly to stronger demand for our game theme conversions.

We are continuing to achieve solid growth in our international business, which is our third strategic priority. Throughout the September quarter, international shipments increased 19% year-over-year, driven by strong demand across the range of international markets from Asia to Latin America and to Europe. Shipments to international market represent a 37% of total new shipments in the September 2007 quarter, compared with 32% a year ago. The acquisition of Orion, and now Systems in Progress also contributed to WMSs' expanding world wide presence for [comp loading] technology and game development capabilities. We remain confident in our ability to further increase our global market share.

Our fourth priority is to improve our operating margin. We are still only in the early stages of implementing our operating margin. We are still only in the early stages of implementing our lean sigma and strategic searching initiatives, but we are achieving excellent through the results and these initiatives will continue to drive margin improvements in future quarters.

In addition through discipline cost management we continue to expect to realize operating leverage from higher revenues. In the September 2007 quarter our operating margin increased 250 basis points over last year even as R&D expenses increased by $4 million or 34%. R&D spending represents the ongoing investment we're making to create intellectual property and advanced technologies to par our innovative products in the future. Assembling what you will see at the G2E trade show next week.

Our operating margin improved to 13% in the September 2007 quarter compared to 10% a year ago. And we continue to anticipate that our operating margin will approximate to 15% to 16% in fiscal 2008 consistent with our previous guidance.

Our fifth priority is to drive higher cash flow. During the September 2007 quarter, net cash provided by operations increased by $13 million to $39 million or 51% higher than same period a year ago. Building on the initial success achieved in the June 2007 quarter we again reduced operating assets and liabilities in the September 2007 quarter, importantly we believe the opportunities continue to abound further improvement in the coming quarters.

In addition, we achieved significant improvement in more efficiently managing the capital deployed in our gaming operations business. The installed footprint of participation games on September 30 increased by 418 units over the June 30 installed base, our investment in these devices totaled $15 million compared to $24 million invested in the June 2007 quarter.

Our investment and gaming operations equipment reflects the continued strong positive response to our three new participation platforms; Community Gaming, Sensory Immersion Gaming and Transmissive Reels gaming technology. As a result of improved cash flow our cash and cash equivalents rose $27 million, or more than 50%, to $80 million at September 30, 2007.

Let me address our priorities to utilizing some important improvement cash flow. We will continue to emphasis internal and external investments to create in-licensed advanced technologies and intellectual property. We also seek acquisitions that can expand our international presence and thus reduce our reliance on North America, expand our talent pool and increase our earnings potential. With 2007 quarter our R&D spending increased $4.3 million over the prior year quarter and we also invested $1.4 million in investment and advances in royalties, technologies and brand licenses.

Our growing up are results of clear evidence that these opportunities continue to offer the highest return potential to creating sustainable shareholder value. We also consider using available cash repurchase shares and over market transactions.

Now I would like to turn over the call to Orrin, who will provide an update on our gaming performance and prior development efforts.

Orrin Edidin

Thanks Brian and good afternoon everyone. Our key component in growing our gaming operations revenues is the success of our sensory immersion platform with Top Gun and our Transmissive Reels platform with Monopoly Super Money Grab both wider and progressive games. Additionally, our install base of standalone participation gaming machines continue to grow with additional placements of our Monopoly Big Event and Monopoly Super Grand Hotel offerings.

The continued success of Monopoly Big Event, our first community gaming product, is an excellent example of the value we create by using next generation technology to enable new gaming features and great content to build new product platforms and categories. As of September 30, 2007 we have more than 1,800 Big Event units installed and in the year or so since the game launched, very few units have come off the floor.

Building on the innovative gaming platforms and foundational technologies using Community Gaming, Sensory Immersion gaming and Transmissive Reels gaming, we are launching the next installments for each of these categories this quarter, which we believe we'll contribute to additional revenue growth.

In October, we began installing Press Your Luck Big Event a standalone community gaming participation game. We also began to install The Wizard of Oz, a Sensory Immersion game and we'll soon launch John Wayne a Transmissive Reels game both of which are wider and progressive machines in Nevada and GLI jurisdictions.

Reflecting the initial success and improved return on invested capital from our controlled rollout strategy for Transmissive Reels and Sensory Immersion gaming platforms we will maintain our focus on carefully managing the selective rollout for both The Wizard of Oz and John Wayne games.

With the large install base of Monopoly Big Event games and it's longevity on the slot floor we expect that the rollout of Press Your Luck Big Event will largely refresh and maintain that base with some incremental increases in the install base during the course of the next few quarters.

In the Sensory Immersion category, the installed footprint of Top Gun has now reached 700 units including standalone games in non-jurisdictions which do not operate a WAP link. And it's performance remains outstanding. As a result of it's continued high performance and the differentiated game experience of The Wizard of Oz game. We anticipate placements of The Wizard of Oz to lead the incremental placements that will expand our WAP unit footprint going forward.

Similarly, with the launch of John Wayne, we expect to generate incremental WAP placements as this game also be on a different WAP link then Monopoly Super Money Grab game. As of today, the install base of Monopoly Super Money Grab has reached nearly 600 units and our open orders for it and John Wayne together totaled about 300 more gaming machines.

By continuing to emphasis the development of differentiated new products enabled by advanced technologies and innovative game experiences, we could expect to continue to expand our portfolio bandwidth and gain market share in a highly competitive environment. As a result, we continue to expect to achieve solid double-digit revenue growth from our gaming operation business in fiscal 2008.

Turning to the server-enabled marketplace, as you know, we have chosen to pursue a unique path that takes elements of our technology roadmap and converts into commercializable products in advance of the launch of the full functionality of server-based gaming.

Fiscal 2007 was highlighted by the successful launch of community gaming made possible by using a server outside the game to drive the [bonusing] activity from an entire pack of games, thereby creating a true communal gaming experience.

We also commercialized the next leap forward in computing power and capability with our CPU-NXT2 operating system and platform, which will be the basis for our server-enabled games to drive real-time 3D graphics and surround sound capabilities for our Sensory Immersion series, and we combined an interactive [C12]-LCD with additional feel of authentic mechanical spinning wheels to make Transmissive Reels a potential fixture on the server-based slot floor.

In the coming quarters, we will continue to launch new and innovative products that leveraged server-enablement to provide unique gaming experiences to players.

Next week, we expect to once again demonstrate the depth and breadth of WMS innovation at the G2E Trade Show in Las Vegas. You can expect that we will introduce future installments for our three innovative participation gaming platforms, as well as unveil more of our vision behind the expanding portfolio for these foundational products.

In addition, we'll showcase a variety of new base games for our products sales business. And as usual, we have a couple of surprises that will demonstrate that by continuing to listen to what players want, we continue to innovate unique and differentiated products and games.

Another key highlight at G2E will be our server-enabled gaming capabilities. In our booth, we will be demonstrating the (inaudible) interoperability of our Bluebird cabinets, our CPU-NXT2 operating system, and the open access of the Gaming Standards Association communication protocols with other manufacturers, products and systems.

The first version of our software for the server-based world is presently with regulators, and I am pleased to report that we have the first fully G2S compliant software in the front of the regulators. G2S is the open systems Game-to-System protocol recently established by the Gaming Standards Association.

We expect this version of the software, with its capabilities to fully support remote downloading configurations, to be in casino field trials early in calendar 2008. The subsequent phase of our server-enabled software development will include additional server-enabled features, including some first of their kind player and operator benefits, which we expect to submit to regulators in the spring of 2008.

Following the field trial of this subsequent phase later next year, we anticipate commercializing this feature-rich server-based offering in the second half of our fiscal 2009.

As we continue to proceed along our planned time-table to this next generational leap in technology, we remain fully committed to leading the development of applications and services, that will offer the highest value to our customers and open up substantial new opportunities for casino operators to build increased customer intimacy, as well as by performing a major leap forward in creating products to provide unique and innovative game experience for players.

At G2E we will showcase a sample of the additional unique technical aspects of server-enabled gaming, along with new applications and the systems capability of our product offerings. As you know, casino players do not necessarily care about the technology or the software behind the product, what they really want is to have a great experience, and what operators want is a high return on their investment. And it's our job to use innovation and enabling technologies to make both a reality. I invite you to please join us at G2E and see these exciting products.

Now, let me turn the call over to Scott, to review our financial performance.

Scott Schweinfurth

Thanks, Orrin and good afternoon everyone. For the fiscal 2008 first quarter, total revenues increased $22 million year-over-year or 20% to a $132.5 million, and were just above the high end of the range of the revenue guidance we provided in August.

Product sales revenues rose $12 million or 18% year-over-year, and we are particularly pleased with this growth in the face of the tough challenges of the current domestic replacement market and the fact that the September 2006 results included a strong contribution from Oklahoma, which was a new market for us at that time.

The primary contributor to the product sales revenue growth was a 19% increase in international unit shipments. The average selling price was up 5% over the prior year to $12,840, principally reflecting the benefit of a higher percentage of premium price products in the overall product mix.

Other product revenues were a significant contributor by increasing $6.8 million year-over-year, reflecting strong sales of game and CPU-NXT conversion kits, parts and used games.

Conversion kit sales grew to over 2500 units, compared to the 910 units in the prior year quarter, due to the positive response to our new video and Mechanical Reel Games. Gaming operations revenues in the September quarter increased 23% or $10 million year-over-year on an average installed base of 8,351 units and average daily revenue of $60.28.

At September 30, 2007, the total installed base was 8,694 units, an increase of 22% year-over-year and a strong 5%, or 418 units of quarterly sequential gains. Year-over-year the number of WAP units in the installed base was lower than last year, reflecting our selective and gradual rollout of the Sensory Immersion and Transmissive Reel platforms this year, compared with the rapid ramp of the POWERBALL installed base last year, which reached to [venus] in the September 2006 period before attaining a more right-sized footprint.

The success of our controlled WAP rollout strategy combined with the higher earnings performance of our games, since evidenced by achieving approximately the same level of WAP associated revenues this year on pure WAP units installed, and is further evidenced in the more restrained level of capital deployed in gaming operations than in the June 2007 quarter. It should be noted that the 144 unit increase in WAP games since June 30, 2007, was an important contributor to the revenue growth in gaming operations in the September 2007 quarter.

Total gross profit excluding depreciation expense increased 27% or $17 million year-over-year to $79.6 million in the September 2007 quarter, and total gross profit margin increased 350 basis points year-over-year to 60.1%. The gross profit on product sales revenues increased $9.4 million, and gross profit margin on product sale increased to 48%, up 510 basis points over last year, while declining only 70 basis points from the June 2007 quarter on 2,600 pure units or 33% less volume, reflecting the usual historical quarterly sequential decline.

Benefits principally realized from process improvements, greater sales of high margin conversion kits and revenues from video lottery terminal contract contributed to the margin expansion.

Gross margin from gaming operations was 79.5% in the September quarter comparable to both the September 2006 and June 2007 quarter, with a greater installed base of WAP units anticipated in the December 2007 quarter and the higher average daily revenue associated with WAP gaming machines, we expect to continue to realize higher year-over-year total gross profit dollars from gaming operation. At the same time, with the lower gross margin percentage realized on WAP games, we would also expect that the gaming operations gross margin will begin to decline somewhat into the second quarter.

Research and Development expenses increased 34% or by $4.3 million year-over-year to $16.8 million, which approximates what we've spent annually on R&D in fiscal 2001. As a percentage of revenues, R&D expenses at 12.7% were higher than our expected full year range, due to the seasonally lower level of revenues in the September '07 quarter. The higher year-over-year level of spending reflects planned higher expenses for product development initiatives including our server-based activities and the inclusion of R&D expenses for SIP, since its acquisition in July 2007.

Quarterly depreciation expense of $18.2 million was $3 million or 20% higher than a year ago period, largely due to a 22% increase in the install based of participation games.

Selling and Administrative expenses were 21% of revenues, inline with the 21.3% level in the September 2006 quarter. Year-over-year, selling and administrative costs were up $4.2 million reflecting incremental expenses associated with the higher level of revenues, higher payroll related cost associated with improved operating performance and headcount increases during the past twelve months and also included the consolidation of SIP which was acquired in July 2007, as well as increased marketing promotion and distribution costs related to the rollout of new products and marketing initiatives.

The effective tax rate for the September quarter was 34.5% and we expect a similar effective tax rate for the December quarter with the anticipation that our federal legislators will extend the R&D tax credit beyond December 31, 2007, so that our effective tax rate would remain at 34.5% for the full year.

We achieved excellent results from our focus on reducing select working capital elements. Cash flow from operations was driven by the growth in net income and the higher year-over-year depreciation, as well as better management of working capital investment even with the 20% increase in our revenues.

We also began to achieve greater effectiveness in the deployment of capital in our gaming operations business. For the September 2007 quarter, capital expenditures for gaming operations equipment was less than the depreciation associated with our gaming operations business. We also benefited from a higher amount of cash generated from stock option exercises, and we did not buyback any shares in the September 2007 quarter.

Attaining further improvements with the capital efficiency of our gaming operations business along with improving the utilization of our working capital are key objectives that will provide additional cash flow and enhance shareholder value.

With that, let me turn the call back to Brian for final comments.

Brian Gamache

Thank you, Scott. The fact that we continue to achieve record quarterly revenues, gross profit, operating margin and net income at a time when our largest market, North America experiences a source replacement demand in recent memory is a testament to the high earning power of our products, which of course drives market share gains.

I am very pleased with the progress, again demonstrated in achieving the strong first quarter results and would like to acknowledge the continued excellent performance of our entire team. Based upon the continued strong earnings performance of our new products and the innovation and differentiation experiences they offer, today we are reiterating the fiscal 2008 annual guidance supervised in August.

As we look at the second quarter, we expect revenues to be in the range of $143 million to $148 million, even as we face the challenging comparison with last year, we benefited from the initial shipments to two new Florida Racinos, and three new Pennsylvania Racinos. This anticipated revenue range for the December 2007 quarter equates to approximately 24% to 25% of our annual revenue guidance, which is consistent with the percentage of revenues achieved in the December quarter in the last two most fiscal both recent years. Our growth will continue to be powered largely by the ongoing success of our participation games and the growth in our international business.

As we look ahead, while number of game jurisdictions continue to offer substantial potential for the expansion of gaming. California, Kansas, Indiana, Florida, Maryland, Massachusetts and in our home City of Illinois, all have opportunities that can provide significant slight expansion. But with the give and take that exists prior to new markets of casinos opening, we believe it is prudent to not include this new potential markets in our revenue expectations for fiscal 2008 at this time. Overall, we believe these opportunities can be categories as to when rather than if they happen, but the resulting growth potential be more likely to occur in our fiscal '09 rather this year.

Additionally, there are international market opportunities that are expected to contribute traditional growth beyond fiscal 2008. I would also note that while it's exciting to talk about new products, game development and market share gains. We are equally focused on improving our operating consistency and in building our consumer touch points as well as our great content. From taking a customer order to a cost, production, and installation, we seek to continually improve our business processes to accelerate our speed to delivery while simultaneously insuring we offer the highest value proposition in the industry.

In closing let me summarize the significant practice in support of our optimism for the second quarter and remainder of fiscal 2008. First: the strong positive response according to our new products, during the past several months, we have conducted numerous product demonstration with our customers as we lead into G2E and a response to our vision and strategy coupled with our great product offerings has been extremely favorable perhaps the most enthusiast response having into any priority to G2E. Second: the continued development of products to utilize our advance technologies intellectual property have positioned us well to drive the adoption of next-generation of gaming products and services.

The industry and inventors will have the opportunity to seeing here about these exciting elements next week at the G2E show. We believe innovations essential to our gaming market share and let me assure you that we will deploy innovation and space next week at G2E.

And third: WMS's cultural and organization has demonstrated both innovation and consistency in a pursuit of new products and revenue capabilities and in adopting the most mind setting tools to drive the process improvements but now being realized in our margin expansion and enhanced cash flow generation. As an organization WMS is now beginning to hit of stride, we are only in the early innings of establishing what we believe will be a consistent track record of success and our pursuit of being one of the most respected admired companies in Corporate America.

Now we'll be happy to take your questions, operator.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And the first question comes from the line of Joe Greff of Bear Stearns. Please proceed

Joe Greff - Bear Stearns

Hey guys, how are you?

Brian Gamache

Hi, Joe.

Joe Greff - Bear Stearns

Question for you. On looking back at this past quarter, and looking at the gross profit margin on product sales which was up a lot more than we forecasted, if you were to sort of allocate that 510 bips of improvement year-over-year, how much of that relates to product mix, and how much of that relates to things that you are doing on Lean Sigma from the strategic sourcing initiatives?

Scott Schweinfurth

I think it is probably a third due to the Prog next meeting more videos and mechanical real show. I think it’s a third due to the ASP and premium-priced to sell during the quarter, and a third is due to the Lean Sigma initiatives including our procurement initiatives.

Joe Greff - Bear Stearns

I got you. And then, Orrin, you mentioned about going to field trials in early calendar '08 for some of the server-based gaming, or the server-centric stuff. How many field trials do you think you are on before you actually add that kind of launch in the second half of fiscal '09?

Orrin Edidin

There will be two primary field trials. As we said, this is a phased submission with the first getting ready to begin in just right at the beginning of the 2008, and our second field trial to occur probably later in the summer, which will be more feature rich and enhanced. So we would probably expect two primary field trials for our first commercialized product roll out.

Joe Greff - Bear Stearns

Great. Thanks, guys.

Operator

And our next question comes from the line of Harry Curtis of JP Morgan. Please proceed.

Harry Curtis - JP Morgan

Hi, guys. I have got three really quick questions. The first is, that it looks like you had a very successful quarter on the conversion kits, and the first question is, do you think that that is sustainable?

Orrin Edidin

Yes, I do, Harry. I think there is always content continues to perform. As it is today, there will be a strong demand for the refreshing of the boxes our there. So, yes, I believe that’s sustainable.

Harry Curtis - JP Morgan

Okay. And then just turning to game ops for a second. Typically, or at least last year, sequentially you see a decline in the win-per-unit going from the June quarter to the September quarter, and yet it was pretty stable in this September quarter, which is great, and I am wondering what you attribute that too?

Brian Gamache

As you know, we have a seasonality issue Harry with the win-per-day, going from the June quarter to the September quarter, and it's strictly due to the success we have in one of the WAP placements.

Harry Curtis - JP Morgan

Okay. So, I guess specifically maybe you could point to either the two or three games that are really driving the higher than expected win-per-unit from a seasonally adjusted basis?

Brian Gamache

I think it's the Sensory Immersion, the Top Gun game and also the Transmissive Reels and Monopoly game.

Harry Curtis - JP Morgan

Okay. And then the last question, we are in the betting business, and I am wondering if you would share with us your views of the over/under on any sort of gaming legislation being passed in the great State of Illinois?

Brian Gamache

Well, I believe that we finally have - it's an opportunity here, sort of, unfortunately a crisis with the transportation, that I believe this could probably get to the finish line, and I have been saying this for a while, but I think Illinois is the most underserved market in the country today, and I believe that this transportation crisis has caused people to think differently about the gaming industry. So, one would hope in the next 7 to 10 days that this would be enacted, but in the worst case scenario, I would see it happening after the first year when they don't need such a vote to get there.

Harry Curtis - JP Morgan

I know there are three components to it: the expansion of the existing gaming floor, a new casino in Chicago, as well as two in the Eastern suburbs of Chicago?

Brian Gamache

That's our understanding.

Harry Curtis - JP Morgan

Okay. Very good, I appreciate it. Thank you.

Brian Gamache

Right.

Operator

And our next question comes from the line of Bill Lerner of Deutsche Bank. Please proceed.

Bill Lerner - Deutsche Bank

Thanks. Brian, can you hear, Brian?

Brian Gamache

Yes, I can, Bill.

Bill Lerner - Deutsche Bank

Okay, thanks. Yeah, two questions. One, as you're starting to pushing expansion and replacement volume, so much more volume through the manufacturing process, where do you think--maybe this for Scott--but where do you think product sales, gross margins went up, inc margins, and then have a follow-up for Orrin?

Brian Gamache

I didn’t quite hear the question. But I think what you asked is, why is the margin up so much in gross product sales?

Bill Lerner - Deutsche Bank

No, no, I’m saying, where do you think margin is going? I'm contemplating the benefit of expansion and replacement on volume and factoring both product sales and OpEx volumes?

Brian Gamache

We have a bad connection, Bill, but I believe the answer to your question is, I think that we will continue to grow our product margins throughout the year, and you will see us, as we stated, really have a high 40s margin throughout the year. I think toward the end of the year, primarily heading into fiscal ’09, you will see a five handle in front of that gross product margin.

Bill Lerner - Deutsche Bank

Okay. And operating margin, where do you think that goes ultimately?

Brian Gamache

Again, we talked about a 15% to 16% for this year, for the blended average of the year. I think that's going to ramp up sequentially from 13% the first quarter throughout the year. But we would again, as Scott and I’ve said for last several years, we would expect the 20% operating margin here to get back to our former run rates back in the old days.

Bill Lerner - Deutsche Bank

Okay, that's great. And then for Orrin--Orrin, you mentioned, reciprocal interoperability, and we saw that last year at G2E and then ICE, but that I think has more to do with like WMS being able to communicate with the YGT server, for example, so your [stopped] server, potential server communicating that. What's different about interoperability this year? Could you just elaborate a little bit?

Orrin Edidin

Yeah, we wanted to demonstrate reciprocal interoperability with all the manufacturers, all the major manufacturers include [Bailey] and Aristocrat. I mean it's important for WMS as we begin to roll out these specific applications, that they are supported by the various manufacturer systems, and reciprocally that other manufacturer's applications are supported by our system. And having the first GSA compliant submission puts us on the road to get there.

Our strategy, Bill, as we've talked about is, WMS sees ourselves from getting into the most profitable of the application businesses, along the lines of what they've been able to achieve in the internet space. The internet infrastructure is great, if you're enabling infrastructure. But the real returns are made on the applications side, and WMS' strategy is to exploit those various applications both in not just content game enablement, but also remote configuration download, account-based wagering environments, patron and casino services etcetera.

Bill Lerner - Deutsche Bank

Okay. Thanks, guys.

Operator

And our next question comes from lines of Celeste Brown of Morgan Stanley.Please proceed.

Celeste Brown - Morgan Stanley

Hi guys, Good afternoon.

Scott Schweinfurth

Hi Celeste.

Celeste Brown - Morgan Stanley

First, an easy one; can you give the mechanical reels as a percentage of your domestic products sales or total products sales?

Scott Schweinfurth

Yes. It was 27% in the September quarter.

Celeste Brown - Morgan Stanley

And then in terms of your guidance, it sounded like you were more bullish in the terms of the demand for your participation units, which is consistent with what we have been hearing out in the field. Is there something that you are less excited about or more worried about that wouldn’t need you to increase your guidance at this point?

Brian Gamache

Well, again we've given guidance now, but we met or achieved the guidance five quarters in a row, and I believe the guidance that we have in a table today, Celeste, is a realistic.

That being said, over the coming quarters, if one of these events were to transpire, such as a Illinois, or a California, or a Florida, or one of these other opportunities, we would obviously come back and adjust our guidance accordingly. So the answer to your question, I would say one of those events would be, if we continue to see the stickiness of our participation products. We are having great success, as you heard us talk about today that the three new platforms are gaining traction. If we continue to see these products through the second evolution, have the similar traction, we would probably look at upgrading our guidance down the road.

Celeste Brown - Morgan Stanley

Are you more worried about the domestic replacement cycle than you were, when you reported in August or about the same?

Brian Gamache

It's about the same. I think that we have been pleasantly surprised that our demand seems to be upticking going into the show, usually, typically going into the G2E, people are a little bit reluctant to buy products for Q2, and we have seen an uptick in our demand. I think it has to do with lot of the pre G2E meetings we had, and the visibility we have for Q2 is excellent right now, and we are very excited to increase that for Q3 and beyond at G2E. So, I think it is similar, but I would say it’s a little bit more optimistic heading into G2E.

Celeste Brown - Morgan Stanley

Okay, thank you.

Operator

And our next question comes from line of Todd Eilers of Roth Capital Partners. Please proceed.

Todd Eilers - Roth Capital Partners

Hi guys, how are you.

Brian Gamache

Hi, Todd.

Orrin Edidin

Hi.

Todd Eilers - Roth Capital Partners

Couple of questions. First, a follow-up to an earlier question on your other product sales revenue line item, I heard you guys say that you expect game conversions or converging kits to maintain this level going forward. How about the rest of that, the line item, it seems to be doing very well over the last couple of quarters, should we expect similar levels for the remaining pieces of what's included in that line item?

Orrin Edidin

Yeah, I think we have done a good job at expanding the parts business. We have also seen a bit of an uptick in the used game business where -- this quarter we actually sold a greater number of unit at a higher average selling price, and as we move down the road here, we will get to selling more used Bluebird units which will have an even higher average selling price than certainly what our legacy units are commanding these days.

Todd Eilers - Roth Capital Partners

Okay. Also, could you maybe update us on your activities in Oklahoma right now? How you are doing in terms of sales and then also on participation placements?

Brian Gamache

As you know Todd, we've got two distribution arms there. We go directly to some of the customers and we have MGAM representing us to other customers. So, we continue to sell into the market. It’s a very great market for us in the last, call it 15 months, we have team zero participation, and they are not in our backlog number or our footprint number. So the market continues to perform well for us and we think there is tremendous upside.

Todd Eilers - Roth Capital Partners

Okay. And then also kind of a regional question. You had a lot of wild fires out here in the west coast recently, a number of tribal Casinos shut down for a period time. Have you guys seen an impact at all on your gaming ops business at all over that period of time?

Brian Gamache

I just asked that question this morning, Todd. The answer is it's diminished, it's not even a rounding error. So, it’s a very small number.

Todd Eilers - Roth Capital Partners

Okay. And then one final question. In your non-operating income line it looks like you had a positive number, and they are a little bit higher than normal. Can you maybe help us understand what’s going on there? What’s driving that?

Orrin Edidin

Yeah. I think there is really two pieces for that. One is, as we have expanded our cash balance, we are investing that, and so that's created a little bit of additional income. And I also believe that foreign currency was higher at this period as a result of movement of dollar and the Euro primarily.

Todd Eilers - Roth Capital Partners

Okay. Can you maybe -- I don't know if you know it's top of your head maybe we can touch base offline but do you know how much maybe each of those contributed to?

Scott Schweinfurth

You know, I don't have that in front of me Todd, so I'll give you a call afterwards.

Todd Eilers - Roth Capital Partners

Okay, that's fine. Thanks guys.

Operator

And our next question comes from the line of Steve Wieczynski of Stifel Nicolaus. Please proceed.

Steve Wieczynski - Stifel Nicolaus

Hi, good afternoon, guys.

Brian Gamache

Hi, there.

Steve Wieczynski - Stifel Nicolaus

One question for you, and I am not sure, if you will answer or won't answer it, but on the international side of business, can you just give kind of a high broad view of where you are seeing demand for the WMS products at this point?

Brian Gamache

It's really all over the map, Steve, I think that South America has been very good to the company, I think Europe has starting to pick up and I think Asia has kicked in nicely as well. So I think that all things being equal we are really giving on a broad universe.

Steve Wieczynski - Stifel Nicolaus

Okay. Great, thanks guys.

Operator

And our next question comes from the line of Steve Altebrando of Sidoti and Company. Please proceed.

Steve Altebrando - Sidoti and Company

Hi, guys, I see the install base is already above the average what you guys got it for the year. But also you maintain your guidance, do you anticipate the install base trending down somewhat or I guess I am just trying to figure out?

Orrin Edidin

With the lot of the backlog is for the refresh, Steve, of these three platforms that we launched them last year and so we are waiting to see the stickiness of those refreshes if we can have a creative footprint then we probably would in the next call look at adjusting guidance but at this point we weren't comfortable given the visibility we have based on the fact that two of the launch refreshes have just hit the market in the last week or two. We wanted to give some traction there, but we are doing very well on the gaming ops business. And we continue to look at that as a huge focal point of our growth story.

Steve Altebrando - Sidoti and Company

Okay. Do you have a rough breakdown as far as open orders on the participation side of what's well?

Orrin Edidin

It's about a 50%--it's a two for one deal.

Steve Altebrando - Sidoti and Company

And it's not, I sorry.

Brian Gamache

Of the 23,000 open orders, about two-thirds are wider about one-third is standalone,.

Orrin Edidin

And it's about two-for-one slot.

Brian Gamache

Right, accretive versus --

Steve Altebrando - Sidoti and Company

Okay. Anything meaningful as far as timings of installation in the quarters is it waited towards the end of the quarter or?

Brian Gamache

This particular one is, it's pretty much evenly spread, because the launches are happening throughout the quarter. But I typically, they do tend to happen at the end of the quarter. But in this particular case in Q2, it's fairly consistent throughout.

Steve Altebrando - Sidoti and Company

Okay. Thank you, guys.

Operator

Ladies and gentlemen, thank you for your questions. Mr. Gamache I will now turn the call back to you. Please continue with your presentation or closing remarks.

Brian Gamache

Thank you for joining us this afternoon. We look forward to reporting our additional progress on the next call. We will discuss our fiscal second quarter results and look forward to seeing many of you in the next week at G2E in Las Vegas.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for your participation. And I say, you please disconnect your line. Thank you once again for participating and have a great day.

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Source: WMS Industries F1Q08 (Qtr End 9/30/07) Earnings Call Transcript
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